Nature-related risks and directors’ duties

On 11 March 2024, the Commonwealth Climate and Law Initiative (CCLI) released their opinion on Nature-related risks and directors’ duties under the law of England and Wales detailing the importance of sound climate risk governance and the growing focus on directors’ duties in the face of increasing nature-related risks.

Commonwealth Climate and Law Initiative opinion

The CCLI opinion explores the duties a director must consider, both as to how nature can affect their business and what impact their business has on nature.

The opinion focuses on three particular aspects of directors’ duties, within the context of nature-related risks:

1. section 172 Companies Act 2006: the duty to promote the success of the company for the benefit of its members as a whole;
2. section 174 Companies Act 2006: the duty to act with reasonable skill, care and diligence; and
3. the obligation to disclose information about the company in its reports.

Nature-related risks are similar to, and encompass, climate-related risks (being those risks relating to climate change) but cover a wider breadth of other potential risks, including biodiversity loss and ecosystem degradation, which a company may be exposed to or risk contributing to.

Promote the success of the company for the benefit of its members as a whole

Under section 172 Companies Act 2006 a director has a duty to promote the success of their company. This is a broad and flexible duty, intended to ensure that directors have regard for the long-term success of the business for the benefit of its members as a whole. Section 172 does expressly state that directors should consider “the impact of the company’s operation on the community and environment” which, in the opinion of the CCLI, includes nature-related risks. Directors should therefore be aware of their duty to consider how promoting the success of the company could potentially impact upon nature and exercise their powers accordingly.

To act with reasonable skill, care and diligence

A director’s duty to act with reasonable skill, care and diligence is considered both objectively and subjectively. A director must, as a minimum, discharge their duty with the general knowledge, skill and experience which may reasonably be expected of a director, but their actions will also be considered on the basis of their specific knowledge, skill and experience. Directors should be alive to any potential nature-related risks which could, from their experience, impact their own business. Whilst directors have a duty to a company’s members to capitalise on opportunities for the company appropriately, the CCLI opinion reinforces that directors must ensure that any nature-related risks are properly considered and mitigated.

Obligation to disclose information about the company

The English disclosure framework is both complex and fact-dependent. A company’s specific reporting obligations will depend on the size of the company, the nature of its business and how it has been incorporated. Whilst the current disclosure regime only includes climate-related recommendations, further recommendations from the Taskforce on Nature-Related Financial Disclosure will soon be adopted into the regime, following their release in September 2023. These will provide companies with a comprehensive guide as to the requirements for climate and nature-related disclosure.

Even under the current disclosure regime, companies are required to disclose any environmental matters which have an impact on the performance and position of the business in their narrative reports. The CCLI opinion suggests that companies should not only disclose any relevant information which could have a material impact on the business financially, but also as to where the activities of the business could have a material impact on nature.

ClientEarth v Directors of Shell plc

In 2023, ClientEarth (an environmental legal charity and token shareholder in Shell) sought to bring a climate-related claim under section 260 Companies Act 2006 against the directors of Shell for alleged breaches of their duties under sections 172 and 174 Companies Act 2006 relating to the company’s Energy Transition Strategy.

In May 2023, Mr Justice Trower refused to give permission for ClientEarth to continue the claim, finding that the applicant had failed to satisfy the Court that it had a prima facie case and noting that the claim was not intended to promote the success of Shell for the benefit of its members as a whole.

Instead, the Court’s opinion was that ClimateEarth’s “motivation in bringing the claim [was] ulterior to the purpose for which a claim could properly be continued” as it had failed to demonstrate the requisite importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing the claim under section 263(3)(b).

Further, Shell had previously obtained 88.4% shareholder approval for its Energy Transition Strategy in 2021, whilst ClientEarth only held a de minimis 27 shares in the company and only had support from 0.17% of Shell’s shareholders. The Court is required to pay particular regard to any evidence of the views of members of the company who have no personal interest, whether direct or indirect, in the claim when considering whether to give permission for it to continue (section 263(4)). With Shell’s Energy Transition Strategy seemingly supported by a significant majority of its shareholders, the Court was satisfied that the directors had implemented a strategy which they believed (in good faith) to be in accordance with their duty to promote the success of the company.

Directors will welcome the Court’s decision to uphold the established English law principle that the Courts will respect the decisions of directors who act in good faith. However, the fact the claim was brought does highlight the ever-increasing importance placed on environmental, social, and governance (ESG) and climate risk governance.

What is climate risk governance?

Climate risk governance is the implementation of processes, structures and rules, within an organisation, designed to tackle the various risks (and opportunities) related to climate change.

Good climate risk governance should allow a company not only to identify and manage any climate-related risks and opportunities, but also to reduce its exposure and subsequent liability for any potential litigation and/ or reputational damage.

Proper implementation of such climate risk governance can also ensure compliance by the company, and its directors, with any statutory and common law duties which relate to climate change.

What should directors consider?

In light of the increased public concern over climate and nature-related risks, the Law Society has released a guide on Climate risk governance and greenwashing risks, setting out a framework to enable solicitors to advise directors on how to identify and tackle potential climate risks.

Amongst other things, the framework identifies a myriad of important questions which a board should consider when assessing a company’s exposure to nature-related risks. These include asking if directors are:

• incorporating climate risks and opportunities into the board’s understanding of directors’ duties and whether the board considers climate risks and opportunities when taking decisions;
• delegating considerations of climate risk and opportunity identification and evaluation to an individual or committee with relevant expertise;
• considering options for managing relevant risks and taking advantage of associated opportunities;
• ensuring that the company’s exposure to climate-related risks is regularly assessed, including its exposure to any potential litigation and regulatory enforcement; and
• ensuring its exposure and management of climate-related risks are fully disclosed (either in its annual reports or other disclosure documents) as appropriate.